Mediterranean Agronomic Institute of Chania
Department of Business Economics and Management
Market and Welfare Effects of the Introduction of Second-Generation, Consumer-Oriented Genetically Modified Products
in the European Union
A Thesis Submitted by RIM LASSOUED
In partial fulfillment of the requirements ofMaster of Science Degree in Business Economics and Management
Supervised by PROFESSOR KONSTANTINOS GIANNAKAS
Chania, Greece June 2008بسم الله الرحمن الرحيم
In the Name of Allah, the Most Gracious, the Most Merciful
Acknowledgements
This thesis was completed in Chania. My experience in Greece could not have occurred
without the kind help of nice people.
I am grateful to the International Center for Advanced Mediterranean Agronomic Studies
(CIHEAM) and the Mediterranean Agronomic Institute of Chania (MAICH) for giving me the
opportunity to pursue my M.Sc. degree.
I would also like to thank the Business Economics and Management Program, the Director
Dr. George Baourakis and the Department secretary, Mrs. Carmen Clapan for their constant
help and support.
I am particularly grateful to Professor Konstantinos Giannakas at the University of Nebraska
in the USA, for all his efforts and support in supervising this thesis.
Finally, I dedicate this thesis to my mother Mounira and my father Khaled, for taking the time
and effort to “not drop me on my head” when I was an infant. Without their care and
support, I would have been unable to complete this thesis and pursue my dreams.
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TABLE OF CONTENTS
Acknowledgements…………………………………………………………………………1
Table of contents ……………………………………………………………….…….…….2
List of abbreviations ………………………………………………………………….…....4
List of figures ………………………………………………………………………………5
List of tables ………………………………………………………………………………..6
Abstract…...………………………………………………………….……………………..7
Introduction……………………………………………………………………………...8
CHAPTER 1: Adoption, Acceptance and Regulation of GM Products…11
1.1. Adoption of biotech crops around the world..................................................12
1.2. Adoption of GM crops in the EU ..................................................................12
1.3. Consumer attitudes towards GM products......................................................13
1.4. International regulation of GM products .......................................................15
1.5. GM product regulation in the EU…...……………………………………….18
CHAPTER 2: Market Conditions Before the Introduction of Second-.........
Generation, Consumer-Oriented GM Products...................22
2.1. The model.......................................................................................................23
2.1.1. Product and consumer characteristics..........................................................23
2.1.2. Producer characteristics...............................................................................25
2.2. Consumer decisions and welfare before the introduction of the new GM
products...................................................................................................................25
2.3. The Producer decisions and welfare before the introduction of the new GM
products..................................................................................................................27
2.4. Market outcome before the introduction of the new GM products................28
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CHAPTER 3: Market Conditions After the Introduction of Second-
Generation, Consumer-Oriented GM Products ..............31
3.1. The model.......................................................................................................33
3.2. Consumer decisions and welfare after the introduction of the new GM
products…………………………………………………………...……………..34
3.3. Producer decisions and welfare after the introduction of the new GM
products………………………………………………………………………….36
3.4. Market outcome after the introduction of the new GM products.................. 37
CHAPTER 4: Market and Welfare Effects of the Introduction of Second-.
Generation, Consumer-Oriented GM Products....................40
4.1. Market effects of the introduction of the new GM products ....................41
4.2. Welfare effects of the introduction of the new GM products ...................44
CHAPTER 5: Summary and Concluding Remarks…………………………. 50
References………………………………………………………………………………..54
Appendix……………..……………………………………………………………….….57
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List of abbreviations
BSE: Bovine Spongiform Encephalopathy
DNA: Deoxyribonucleic acid
EU: European Union
EC: European Commission
EEC: European Economic Community
GM: Genetically Modified
GMOs: Genetically Modified Organisms
GMP: Genetically Modified Product
NGOs: Non Governmental Organizations
UK: United Kingdom
UN: United Nations
US: United States
WHO: World Health Organization
WTP: Willingness To Pay
WTO: World Trade Organization
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Table of figures
Figure 1.1: EU member states’ support for GM food (percent)............................15
Figure 2.1: Consumer decisions and welfare before the introduction of the new
GM products.........................................................................................................26
Figure 2.2: Producer decisions and welfare before the introduction of the new
GM products.........................................................................................................27
Figure 3.1: Consumer decisions and welfare after the introduction of the new GM products ………………………………………………………………………….35
Figure 3.2: Producer decisions and welfare after the introduction of the new GM
products ................................................................................................................36
Figure 4.1: Consumer and producer decisions when V>V** ................................41
Figure 4.2: Market effects of the introduction of the new GM products..............43
Figure 4.3: Market and welfare effects of the new GM products when
V*<V<V**.............................................................................................................47
Figure 4.4: Market and welfare effects of the new GM products when
V**<V<V***……………………………..………………...…………...……….48
Figure 4.5: Market and welfare effects of the new GM products when V>V***
……………………………………………………………………………………49
Figure A.1: Consumption decisions after the introduction of the new GM products
when p’o
c
= p’c
c
= p sgm
c
………………………………………………..60
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List of tables
Table 1.1: GM maize production (ha) in some EU countries................................13
Table 1.2: Regulatory approaches to GM products around the world...................17
Table 2.1: Product demands and supplies before the introduction of the new
GMPs……………………………………………………………………………29
Table 3.1: Product demands and supplies after the introduction of the new
GMPs…………………………………………………………………………....37
CHAPTER 1 12
CHAPTER 2 23
CHAPTER 3 32
CHAPTER 4 41
CHAPTER 5 53
Abstract
This thesis builds on the literature on the economic effects of the second-generation,
consumer-oriented GM products by analyzing the market and welfare impacts of the
introduction of these new products in markets that, like the EU, mandate the segregation
and labeling of the first-generation, producer-oriented GM products. In particular, this
study seeks to determine the effects of these consumer-oriented GM products on the
markets of conventional, GM and organic products, and the welfare of consumers and
agricultural producers.
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To determine the market and welfare effects of the second-generation, consumer-
oriented GM products, the study compares and contrasts the equilibrium quantities,
prices, and (consumer and producer) welfare before and after the introduction of the new
GMPs. In deriving the different equilibria, the thesis explicitly accounts for the
empirically relevant differences in consumer preferences for conventional, GM and
organic products as well as for differences in the returns associated with the production
of these products. The models developed allow for both vertical and horizontal product
differentiation and facilitate the estimation of consumer and producer welfare in a
theory-consistent and tractable manner.
Our analysis indicates that the market effects of the introduction of the second-
generation GMPs in countries that mandate the labeling of their first-generation
counterparts are similar to the effects in markets that treat GM and conventional
products as substantially equivalent and do not require the segregation and labeling of
GM products. While a country’s labeling policy on GMOs does not affect the market
effects of the second-generation GM products, it does affect the effect of these products
on producer and consumer welfare. In this context, the results of this thesis should be of
interest to policy makers, academics, and all participants in the GM, conventional and
organic food supply channels.
Introduction
One of the most intriguing attributes of modern industrial society is its approach to nutrition.
Humanity has moved from subsistence economies, where eating was a matter of survival, to
economies characterized by increasing consumer demands for greater variety of food products
and dietary excesses that have led to a spate of, so-called, diseases of civilization:
cardiovascular disease, obesity, diabetes and certain types of cancer. Technological progress
has resulted in the appearance of new concepts such as genetically modified organisms
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(GMOs), nutraceuticals, functional products and dietary supplements which have influenced
the consumer view of, and perceptions about food.
The list of important types of food products included in our diet has lately been expanded to
include the genetically modified (GM) products. Despite their important agronomic benefits
to agricultural producers (e.g., increased yields and/or reduced input costs), GM products
have been facing increasing consumer opposition. Fears related to potential health and
environmental effects of genetic modification as well as moral and philosophical concerns
have consistently been cited as the driving forces behind the expressed consumer aversion to
GM products. This consumer opposition varies significantly between countries and so does
the countries’ regulatory response to products of biotechnology (Giannakas and Fulton,
2002). For instance, while the United States of America (US), the world leader in GM
production, treats biotech products as substantially equivalent to their conventional
counterparts and does not require their segregation and labeling, the European Union (EU)
has instituted a mandatory labeling regime that is regarded as the strictest in the world.
Consumer opposition to GMOs is the strongest in the EU where, intriguingly, consumer
confidence in the food safety and inspection systems is among the lowest in the developed
world. This lack of trust is thought to originate, at least in part, from recent series of food
safety scares like the Bovine Spongiform Encephalopathy (BSE, also known as the Mad Cow
Disease) incidents in the United Kingdom (UK), the Foot and Mouth disease, and the dioxin
contamination of poultry in Belgium. While the EU appears to have made food safety a top
priority through its new integrated “farm to fork” food safety approach, restoration of
consumer confidence should be expected to, at best, be gradual. This is particularly important
for GM products where the lack of conclusive scientific evidence on their long-term health
and environmental impacts introduces an element of uncertainty, which, when combined with
a low confidence in the food safety and inspection systems, can rationalize the, often viewed
as irrational, consumer fears.
Apparently, the focus of the first-generation GM products on conferring agronomic benefits to
producers (while providing no perceived advantages to consumers) did little to promote the
market acceptance of these products. Consumer opposition to GM products is expected to
decrease (even if by a tiny bit) with the introduction of second-generation GM products,
however. Many of these new GM products are close to their commercialization stage and
focus on providing direct consumer benefits by enhancing the quality of a product. Important
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examples of these consumer-oriented, second-generation GM products include the vitamin A
enriched golden rice and high-oleic soybeans (Giannakas and Yiannaka, 2008, 2006).
Giannakas and Yiannaka (2008) have developed a methodological framework of
heterogeneous consumers and producers to analyze the market and welfare impacts of the
introduction of these consumer-oriented, GM products into the food system of countries that,
like the US, do not require segregation and labeling of the first-generation, producer-oriented
GM products. The objective of this thesis is to determine the market and welfare effects of the
introduction of these new GM products in markets that, like the EU, mandate the labeling
(and segregation) of the first-generation GM products. In particular, this thesis seeks to
determine the effects of the introduction of the second-generation, consumer-oriented GM
products on the markets of organic, conventional, and GM food products and to identify the
winners and the losers from their introduction into the agro-food system. To our knowledge,
this study represents the first attempt to systematically analyze the economic effects of the
introduction of consumer-oriented GM products in markets that, like the EU, have a
mandatory labeling regime governing the products of biotechnology.
To analyze these market and welfare impacts of the new consumer-oriented GM products, our
analysis extends and adapts the Giannakas and Yiannaka (2008) framework of analysis to
account for the fact that, in the markets considered in this study, the current first-generation
GM products are required to be segregated and labeled as such. It is important to emphasize
that this is a meaningful extension of the literature on this issue as the presence (or absence)
of a labeling regime for the first-generation GM products has been shown to have significant
effects on equilibrium prices, quantities and the welfare of the interest groups involved
(Giannakas and Fulton, 2002; Fulton and Giannakas, 2004; Lapan and Moschini, 2004; Lence
and Heyes, 2005; Veyssiere and Giannakas, 2006). In addition to providing important new
insights on the likely economic impacts of the new consumer-oriented GM products, our
study can provide an explanation for the position on agricultural biotechnology of the relevant
European interest groups involved.
The rest of this thesis is structured as follows. Chapter (1) presents background information
on the adoption of GMOs, the consumer attitudes towards these organisms, and their
regulation around the world. Chapter (2) derives and presents the market conditions before the
introduction of second-generation, consumer-oriented GM products, whereas chapter (3) deals
with the market conditions after the introduction of these new GM products. Chapter (4)
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determines the market and welfares effects of the introduction of the second-generation,
consumer-oriented GM products. Chapter (5) summarizes and concludes the thesis.
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CHAPTER 1
Adoption, Acceptance and
Regulation of GM Products
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Before delving into the analysis of the market and welfare effects of the introduction of
consumer-oriented, second-generation GM products into the food system, it is useful to
provide some background information on the adoption, consumer attitudes and regulation of
GMOs around the world.
1.1. Adoption of biotech crops around the world
The first GM seeds were planted in the US for commercial use in 1996. Ten years later, GM
crops were grown on 102 million hectares worldwide (see Figure 1.1). Between 2005 and
2006 the land devoted to the production of GM crops increased by 13%; an area nearly the
size of France and Germany combined. The US is the major GM producing country
accounting for half of the total GM cultivations in 2006.
According to the International Service for the Acquisition of Agro-biotech Applications
(ISAAA), 10.3 million farmers in 22 countries grew GM soy, maize, rape and cotton in 2006.
GM papaya, alfalfa, squash and rice were also cultivated on smaller areas. The 22 countries
growing biotech crops included 11 developing countries and 11 industrial countries – namely,
in order of acreage devoted to GM crops, USA, Argentina, Brazil, Canada, India, China,
Paraguay, South Africa, Uruguay, Philippines, Australia, Romania, Mexico, Spain, Colombia,
France, Iran, Honduras, Czech Republic, Portugal, Germany, and Slovakia. Notably, the eight
largest producers grew more than 1 million hectares each (James, 2006).
The global market value of biotech crops in 2006 was $6.15 billion representing 16% of the
$38.5 billion global crop production market and 21% of the $30 billion global commercial
seed market. Soybeans and maize accounted for 44% and 39% of the global market value of
biotech crops, respectively, while cotton and canola accounted, respectively, for 14% and 3%
of it.
1.2. Adoption of GM crops in the EU
Even though GM crops accounted for less than 1% of the EU maize cultivation area in 2006,
the adoption of Bt maize (which is the only GM crop that has been grown in the EU) is
increasing. Spain has been the main GM producer in the EU accounting for 87% of the 62,000
hectares devoted to GM maize in 2006 (James, 2006). In 2007, this GM crop was grown on a
total of almost 110,000 hectares in Spain, France, Portugal, Czech Republic and Germany
(Table 1.1).
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Table 1.1: GM maize production (ha) in the EU
Source: http://www.gmo-compass.org/eng/agri_biotechnology/gmo_planting/191.eu_growing_area.html
After years of an effective EU moratorium to GM crops, the cultivation of GM plants is now
legally possible in all EU countries as the new EU legislative framework for the approval of
GM feeds and foods has been enacted in the entire EU. Nevertheless, by use of various
national regulations and decrees, the cultivation of GM plants has been limited in some
member states such as Germany, Austria and Hungary. Since such regulations must, by law,
be based on scientifically sound knowledge, the EU Commission has taken legal action
against the national policies of these states. Legislation concerning GMOs will be further
discussed later in this chapter.
1.3. Consumer attitudes towards GM products
As mentioned earlier, while the world-wide adoption of biotech crops has been increasing
rapidly, consumers in general, and European ones in particular, have been opposing the
development of GM plants and animals as well as their use in food production. Consumer
opposition to biotech products has been expressed mainly through opinion surveys even
though a more extreme expression of sentiments has also occurred. A case in point is the
destruction of 50% of the total GMO field trials in France in 2003 (see
www.Biomatnet.org/publications/2024con.pdf).
It is becoming more and more apparent that consumer choice regarding novel foods is not
driven only by prices and economic status, but also by ethics and emotions. While consumers
are aware of benefits like enhanced pest resistance and increased yields (case of first-
generation GM foods) and improved nutrition or new products (case of second-generation
GM foods), they are also concerned about potential adverse effects on human health and the
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GM maize (ha)
2006 2007
Spain 54,000 75,000
France 500 20,000
Czech Republic 1,290 2,650
Portugal 1,250 5,000
Germany 950 3,000
environment. Obviously, consumer concerns about GMOs affect their behavior as well as the
behavior of food suppliers and retailers.
Overall, the reasons that have periodically been provided for the European consumer aversion
to GMOs include (see saasinc.org/Tulsa2004/TulsaPresentations/ SAAS_Hoban.ppt):
Biotechnology arrived to the EU market on the heels of mad-cow disease and other
food safety problems
EU consumers have realized no direct benefits from the first generation of GMOs
There are concerns about the long-term effects on the environment and human health
Europeans resent “Americanization” in all its forms, but particularly when it comes to
food (e.g., McDonalds)
In addition to affecting the behavior of processors and retailers of the relevant food supply
channels, consumer opposition to GMOs is viewed as a key determinant of the regulatory
response to products of biotechnology. Both the EU moratorium on GMOs and the
introduction of strict labeling and traceability requirements in 2004 have used the consumer
reaction and “right to know” as their basis and justification. Note that, due to genetic
modification being a credence process attribute, labeling is the single most important means
of identifying these products (Giannakas and Fulton, 2002).
While the majority of European consumers remains skeptical about GMOs, the share of those
who are optimistic about the prospects of biotechnology has been increasing in recent years.
Also on the rise appears to be the consumer confidence on the EU’s regulatory oversight of
GMOs. Figure 1.1 summarizes the level of consumer support to GMOs in the EU in 2006.
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Figure 1.1: EU member states’ support for GM food (percent)
Source: http://www.gmo-compass.org/eng/news/stories/227.eurobarometer_europeans_biotechnology.html
1.4. International regulation of GM products
In the last decade, international trade in agricultural commodities and processed foods has
been significantly increased. This increase was accompanied by economic trade restrictions,
tariffs and safety standards. Regarding the GM products, they have been subject to various
import approval procedures, bans, labeling and traceability requirements. Whereas import
approval is a direct measure affecting market access, labeling and traceability indirectly
affects trade through the imposition of the cost of implementation to exporters of GM crops.
In addition, marketing regulations can affect the demand for GM versus non-GM crops; for
example, it has been argued that GM food labels can act as perceived hazard warnings and
reduce demand for these crops despite their approval from food safety authorities (Gruère,
2006).
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Governments worldwide regulate foods with three objectives (Potter and Hotchkiss, 1995).
The first is to ensure the security and wholesomeness of the food supply. The second is to
prevent economic fraud. The third is to inform consumers about the nutritional content prior
to the purchase and use of food products. Food is required to be labeled honestly and its
package not to be deceptive. In the case of GM food, such responsibility rests on the food
industry and the government which are supposed to cooperate over proper labeling and honest
presentation of novel foods. Even though these regulatory objectives appear to be pretty
common around the world, the regulation of GM food varies widely across countries (see
Table 2). Nowhere is the difference in the regulatory approach to GM foods greater than
between the EU and the US.
As mentioned in the introduction of this thesis, the EU regulations have established stringent
approval, labeling and traceability requirements on food produced or derived from GM
ingredients based mainly on the “precautionary principle” and consumers’ “right to know.” In
contrast, the US regulatory approach is based on differences in the end product, and, viewing
the producer-oriented, first-generation GM products as “substantially equivalent” to their
conventional counterparts, includes voluntary labeling guidelines for GM food (Fulton and
Giannakas, 2004). Consequently, many novel foods in the US are not subject to special
regulation and are not being segregated from conventional food products. This regulatory
approach can cause problems to American products exported to places like the EU, Australia,
Japan and South Korea where labeling is mandatory.
It is interesting to note that, while some major producing countries like Canada and Argentina
have policies mirroring those of the US, a number of countries have progressively moved
their approval and labeling regulations to resemble those of the EU. These countries do so in
order to either facilitate trade with the EU (e.g., Switzerland), or help their case for accession
to the EU (e.g., Croatia). While the aforementioned countries are among those with a well-
defined regulatory approach to GMOs, there is a large number of, mainly developing,
countries that are currently lacking a regulatory framework governing the approval and
marketing of GM products.
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Table 1.2: Regulatory approaches to GM products around the world
Food safetyapproval regulations
Labelingregulations
Specificity Countries
Group 1 Process based mandatoryStringent, mandatory,
includes derivedproducts
Traceabilityrequirements,
0.9% thresholdEU, East Europe
Group 2 Process based mandatoryStringent, mandatory,
includes derivedproducts
No traceability,low threshold
Brazil, China, Russia,
Switzerland, Norway
Group 3 Process based mandatory “Pragmatic” mandatoryMany labeling
exceptions
Australia, Japan, Korea,
Saudi Arabia, Thailand
Group 4Substantial equivalence,
mandatory (US: voluntaryconsultation)
Voluntary forsubstantial equivalent
food
5% thresholdlevel for labeling
US, Canada,
Argentina,
South Africa,
Taiwan
Group 5 Mandatory (in place orpending)
Mandatory, introducedbut not implemented
“Pragmatic”labeling
requirements
Indonesia, Malaysia,Mexico, Philippines,
Vietnam,
Group 6Mandatory (in place or
pending)Intention to require
labeling
Slow regulatoryprocess
India, Kenya
Group 7 Considering mandatory No clear position Slow regulatoryprocess
Bangladesh,most African
countries
Group 8 No No clear position GM free
A few African countries
(Zimbabwe, Zambia)
Source: Gruère (2006).
Despite the significant differences in the approaches to the regulation of GM products around
the world, there have been some important harmonization efforts related to the research, trade,
and use of GM crops in the context of (Nuffield Council on Bioethics 2003):
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The World Trade Organization (WTO) which aims to control barriers to international
trade. It is there that the US and a number of other countries have challenged the EU
on the authorization of GM crops.
The Codex Alimentarius which is a set of international codes of practice, guidelines
and recommendations pertaining to food labeling and food safety and is recognized as
a reference standard of food safety in the Sanitary and Phytosanitary Agreement of the
WTO.
The Cartagena Protocol on Biosafety introduced in January 2000 under the
Convention on Biological Diversity (CBD), which is a multilateral agreement
covering the trans-boundary movement of living modified organizations (LMOs) that
might have an adverse effect on biological diversity.
1.5. GM product regulation in the EU
As mentioned previously, the development and commercialization of novel foods derived
from GMOs have caused serious concerns and intense debates around the world. Although
there has been no scientific evidence of actual or potential harm from GM food, many
consumers in the EU and elsewhere remain skeptical about genetic engineering. The
regulatory framework for GM products in the EU is based on the proposition that these
products are not harmful or that any harm they may cause is as slight as to be generally
acceptable. Consumers have demanded their right to make informed consumption decisions,
however, which, due to the credence nature of genetic modification, resulted in the
introduction of mandatory labeling and segregation of GM and non-GM food products.
Following below is a listing and short description of the EU directives and regulations
governing food and feed products derived from GM crops.
Directive 90/219/EEC, introduced in 1990, on the contained use of GMOs for the
purpose of protecting human health and the environment.
Directive 90/220/EEC, entered into force in 1991, on the deliberate release of GMOs
into the environment (Official Journal of the European Communities - 8.5.90 - Page
No L 117/15). This proposal includes the labeling of the product that may contain or
may consist of GMOs. The indication could be included on a label or in an
accompanying document.
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Regulation 258/97, introduced in 1997, was entitled the Novel Foods Regulation and
applied to new food products including GMOs. It defined approval procedures
requiring proof that any GM food is safe for human consumption.
Regulations 1813/97 and 1139/98 required the labeling of food products containing
approved GM soybeans and GM corn.
Regulation 49/2000 introduced mandatory labeling of GM food and GM ingredients at
the 1% level.
Regulation 50/2000 extended the labeling requirements to food ingredients containing
GM additives and flavorings.
Directive 2000/13/EC of the European Parliament and of the Council of March 20,
2000 on the approximation of the laws of the Member States relating to the labeling,
presentation and advertising of foodstuffs. The Directive applies to pre-packaged
foodstuffs to be delivered to the final consumer or to restaurants, hospitals, canteens
and other similar mass caterers (see http://europa.eu/scadplus/leg/en/lvb/l21090.htm).
It does not apply to products intended for export outside the Community. According to
this directive, the labeling, presentation and advertising of foodstuffs should not:
- Mislead the consumer as to the foodstuff's characteristics or effects.
- Attribute to a foodstuff (except for natural mineral waters and foodstuffs
intended for special diets, which are covered by specific Community
provisions) properties for the prevention, treatment or cure of a human illness.
The labeling of foodstuffs must include the name under which the product is
sold, list of ingredients, quantity or categories of ingredients expressed as a
percentage, allergens, foods containing meat, net quantity, and date of
minimum durability.
Directive 2001/18/EC, introduced in October 2002, stressed the deliberate release of
GMOs into the environment and repealed Council Directive 90/220/EEC. It
introduced measures to ensure the regulation of GMOs that would meet the demands
of EU regulators and consumers including (García, 2006):
- Principles for environmental risk assessment – According to this directive, if a
company wishes to market a GMO, it must first submit an application to the
relevant national authority of the EU member state. The application has to take
into account direct and indirect effects on human health and the environment
which may arise from placing the product in the market. If no objections are
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noted from EU states, approval is granted and the product can be marketed
throughout the EU.
- Mandatory information for the public.
- Requirement for member states to ensure labeling and traceability at all stages
of the supply channel.
Regulation 1829/2003 took effect on April 18, 2004 and established procedures for
evaluating potential risks from GM food as well as rules on labeling of GM food and
feed.
Regulation 1830/2003 of the European Parliament and the Council of September 22,
2003, concerned the traceability and labeling of GMOs and the traceability of food
and feed products produced from GMOs and amended Directive 2001/18/EC. This
regulation covers all foodstuffs produced from GMOs and stipulates that traceability
will be required throughout the food chain with two main objectives (http://europa.eu/
scadplus/leg/en/lvb/l21170.htm):
- To inform consumers through the mandatory labeling of GM products whether
for human or animal consumption.
- To guarantee a "safety net" based on the traceability of these products at all
stages of production and placing on the market.
Approvals are now granted for a period of 10 years, and are renewable. There is a 0 percent
threshold for unapproved GM crops. Labeling is extended to animal feed, food sold by
caterers, and food derived from GM ingredients even if the end product has no significant
traces of transgenic DNA or proteins. One major addition is the traceability requirements for
GM and non-GM food: any food potentially containing GM material has to be tracked all the
way from the farm to the consumer. This requires food companies to keep track of all
shipments and to conduct DNA or protein tests at different stages of the supply chain. There is
no labeling requirement for products such as meat, milk or eggs produced from animals fed
with GM feed. The purity threshold for the labeling of a product is 0.9% - i.e., a product
containing more (less) than 0.9% of GM material has (does not have to) be labeled as “GM.”
It is important to note that the new labeling and traceability regulation was introduced to force
member states to end the de facto 4-year moratorium on new GM crops and to respond to the
pressure imposed by the US and other countries when they launched a WTO dispute on the
moratorium. Many argue, however, that the mandatory labeling requirements have become
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the new de facto trade barrier for targeted “food” products. In addition, although the labeling
policy does facilitate informed consumer decisions, it also introduces high control and
segregation costs and has the potential to worsen consumer fears of the risks associated with
the production and consumption of GM products.
After discussing the adoption, consumer attitudes, and regulation of GM products around the
world, we focus next on the main objective of this thesis – namely, the determination of the
market and welfare effects of the introduction of the new, second-generation, consumer-
oriented GM products in a market that, like the EU, mandates the labeling of the first-
generation, producer-oriented GM products. How are the markets of conventional, organic
and first-generation GM products going to be affected by the introduction of the new GM
products? Who will gain and who will lose from the introduction of the second-generation
GM products in the market? The answer to these questions is the focus of the rest of this
thesis.
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CHAPTER 2
Market Conditions
Before the Introduction of
Second-Generation,
Consumer-Oriented GM Products
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This chapter focuses on the consumer and producer choices, decisions and welfare as well as
on the market outcome prior to the introduction of the new GM products. Before delving into
the formal analysis of economic behavior and outcomes, it would be useful to present some
key characteristics of the products considered in this study.
2.1. The Model
2.1.1. Product and consumer characteristics
A useful and quite meaningful taxonomy of products that are close but imperfect substitutes is
the one between vertically and horizontally differentiated products. Vertically differentiated
products are those that are uniformly quality ranked by consumers. If those products were
sold at the same price, all consumers would buy the product with the highest perceived level
of quality. Horizontally differentiated products, on the other hand, are those that are not
uniformly utility ranked by consumers. If those products were offered at the same price, they
would all enjoy a positive market share.
To capture the expressed consumer preferences for GM, conventional and organic products
appearing in numerous consumer studies around the world (Lusk et al., 2005), we follow
Giannakas and Yiannaka (2008) and model these products as vertically differentiated ones
with consumers differing in their intensity of preference for quality (Giannakas and Fulton,
2002; Bonnisseau and Lahmandi-Ayed, 2006). Organic products are considered the high
quality products followed by the conventional and first-generation GMPs. Even though the
conventional, GM and organic products in our study differ in their (credence) process
attributes (i.e., the process through which they have been produced), they share the same
observable physical characteristics (e.g., same appearance).
To capture these elements, consider a consumer that has the choice between three versions of
a product available in the market: a conventional product, a first-generation GM labeled
product, and a certified organic product. Assuming that the consumer spends a small fraction
of his expenditure on the goods in question, his utility function can be written as follows:
γ α−−= cfgmfgm pUU : if a unit of first-generation GM product is consumed
δ α−−= ccc pUU : if a unit of conventional product is consumed
β α+−= copUU 0 : if a unit of organic product is consumed
where:
- 24 -
cU , fgmU and oU are the utilities associated with the unit consumption of
conventional, first-generation GM, and organic products, respectively.
The parameter U is a per unit base level of utility derived from the observable physical
characteristics of these products. It is assumed that U exceeds the prices of the
different products and is common to all consumers.
ccp
,
cfgmp
and
cop
represent the consumer prices of conventional, GM, and organic
products, respectively. To allow for positive market shares of these products, our
analysis focuses on the case where cop >
ccp >
cfgmp .1
The characteristic α captures the difference in consumer preferences for the different
products. It takes values between 0 and 1 and consumers are assumed to be uniformly
distributed between the polar values of α.
The parameter β is a non-negative utility enhancement factor associated with the
consumption of the organic product while the parameters γ and δ are non-negative
utility discount factors associated with the consumption of conventional and GM
products, respectively. In this context, αδγ )( − denotes the aversion to GM products
of the consumer with differentiating attribute α . For simplicity and without loss of
generality, in the remaining of this study δ is normalized to 0.
γα−U , δα−U and βα+U represent the consumer willingness to pay (WTP) for a
unit of first-generation, conventional and organic products respectively. Subtracting
the relevant prices from these WTP values provides an estimate of the consumer
surplus associated with the consumption of these products.
1 The condition cop >
ccp >
cfgmp
is a necessary condition for the co-existence of the three products in a
market. As pointed out by Giannakas and Fulton (2002), there are two reasons why the GM products will be
priced lower than their conventional counterparts. First, mandatory labeling means increased marketing and
segregation costs that can cause consumer prices to rise. The majority of these costs are incurred in the non-GM
product chain, which, in turn, implies that the consumer of conventional products faces a greater price. Second, it
is assumed that the GM technology generates production cost savings at the farm level. Some of the cost savings
may be transmitted to the consumer of the first-generation GM products.
- 25 -
2.1.2. Producer characteristics
Under a mandatory labeling regime, producers of a product have the choice of producing the
conventional, the GM, or the organic version of it. Producers differ in the returns they receive
from the different products due to differences in geography, education, experience,
management skills, technology adopted etc. (Fulton and Giannakas, 2004). Let [ ]1,0∈A be
the attribute that differentiates producers. The net returns function of the producer with
attribute A is then:
)( dAwp fgmffgmfgm +−=∏ : if a unit of first-generation GM product is produced
)( cAwp cf
cc +−=∏ : if a unit of conventional product is produced
)( bAwp of
oo +−=∏ : if a unit of organic product is producedwhere:
i∏ (i∈ o c, fgm, ) are the net returns resulting from the production of product i.
f
ip is the farm price of product i.
iw is the base cost of production (reflecting costs not affected by the individual
producer) of product i.
The parameters d, c and b are the cost enhancement factors associated with the
production of the three products. To capture the increased costs associated with
organic food production, we assume that cb > , while to capture the producer
orientation of the first-generation GM products, we assume that dc > with Adc )( −
capturing the agronomic benefits of the GM technology for the producer with
differentiating attribute A.
2.2. Consumer decisions and welfare before the introduction of the new GMPs
A consumer’s purchasing decision is determined by comparing the utilities derived from the
products involved. Figure 2.1 illustrates the decisions and welfare of consumers when the
prices and preference parameters are such that the conventional, organic and first-generation
GM products enjoy positive market shares. The upward sloping curve graphs the consumer
utility when the organic product is consumed, while the downward sloping line shows the
utility when the first-generation GM product is consumed for different values of the
differentiating attribute α .
- 26 -
The intersection of two utility curves determines the level of the differentiating attribute that
corresponds to the indifferent consumer. In particular, the consumer with differentiating
attribute γαα /)(: cfgm
ccfgmfgmcfgm ppUU −=⇒= is indifferent between consuming a unit of
the conventional and a unit of the GM product as the utility associated with their consumption
is the same. Similarly, the consumer with differentiating attribute
βαα /)(: cc
cococc ppUU −=⇒= is indifferent between consuming a unit of conventional and a
unit of the organic product. Consumers located to the left of fgmα prefer the GM products,
consumers with cfgm ααα << prefer the conventional product, and consumers with cαα >
prefer the organic product. Normalizing the mass of consumer to one, the consumer demands
for the three products are:
γα /)( cfgm
ccfgm
Dfgm ppX −== (1)
[ ] β λββλλαα /)( cfgm
cc
cofgmc
Dc pppX ++−=−= (2)
ββα /)(1 cc
coc
Do ppX +−=−= (3)
- 27 -
Figure 2.1: Consumer decisions and welfare before the introduction of the new GM products
Consumer surplus
Consumer surplus (defined as the difference between the consumers’ willingness to pay and
the price they actually pay for their product of choice) is given by the area under the effective
net utility curve in Figure 2.1 and equals:
Ω++=++= ∫∫∫ BAdUdUdUCSc
c
fgm
fgm
oco fgm αααα
α
α
α 1
⇒ 2/2/)²(2/)²( ββλ +−+−+−= co
cc
co
cfgm
cc pUppppCS (4)
2.3. Producer decisions and welfare before the introduction of the new GMPs
A farmer’s production decision is determined by comparing the net returns associated with the
production of first-generation GM, conventional and organic products. The figure 2.2 below
graphs the relevant net returns when the prices and agronomic parameters are such that the
three products enjoy positive market shares.
The intersection of two net return curves determines the level of the differentiating attribute
that corresponds to the indifferent producer. In particular, the producer with differentiating
- 28 -
Figure 2.2: Producer decisions and welfare before the introduction of the new GM products
attribute )/()(: cbwwppAA cof
cf
oooco −+−−=⇒∏=∏ is indifferent between producing a
unit of conventional and a unit of organic product as the net returns from the production of
these products are the same. Similarly, the producer with differentiating attribute
)/()(: dcwwppAA fgmcffgm
fcccfgmc −+−−=⇒∏=∏ is indifferent between the
conventional and the first-generation GM product. Producers with differentiating attribute
[ ]oAA ,0∈ produce the organic product, producers with ],( co AAA∈ produce the
conventional product and producers with ]1,( cAA∈ produce the GM product. The supply
functions of the three products are then:
)/()( cbwwppAX cof
cf
ooSo −+−−== (5)
))(/()]()()([( cbdcwwppbwwppdwwppcAAX fgmcffgm
fcco
fc
fofgmo
ffgm
fooc
Sc −−+−−++−++−++=−=
(6)
)/()(11 cbwpwpAX fgmffgmc
fcc
Sfgm −+−−−=−= (7)
Producer welfare
Aggregate producer welfare is given by the shaded area underneath the effective net returns
curve in Figure 2.2 and equals to:
Θ++=∏+∏+∏= ∫∫ ∫ EDdAdaPWc
o c
o A fgm
A A
A co
1
0 ⇒
2/)(2/)²()(2/)²( dwpdcwwppcbwwppPW fgmffgmfgmc
ffgm
fcco
fc
fo −−+−+−−+−+−−= (8)
2.4. Market Outcome before the introduction of the new GMPs
After having determined the demand and supply functions for the different products, this
section will determine the market outcome prior to the introduction of the second-generation
GM products by simultaneously solving the relevant demand and supply equations derived
previously and summarized in Table 2.1. The parameter fi
cii ppmm −= is the marketing
margin in the supply channel of product i (where i∈ c, o, fgm).
- 29 -
Table 2.1: Product demands and supplies before the introduction of the new GMPs
In particular, by equating equations (1) and (7), the equilibrium quantity for the first-
generation of GM product is derived as:
)/()(* γ+−++−−−= dcwmmwmmdcX ccfgmfgmfgm (9)
The smaller the marketing margin of the first-generation of GM products, their base cost of
production, and the consumer aversion to these products, or/and the greater the agronomic
benefits from GM production, the marketing margin and the cost of producing the
conventional products, the greater the market share of the first-generation GM products.
By equating equations (3) and (5), the equilibrium quantity of the organic product is given by:
)/()( ββ +−++−−=∗ cbwmmwmmX ccooo (10)
The smaller the marketing margin and the base costs of producing the organic product, or/and
the greater the consumer preference for the organic product, the marketing margin and the
cost of producing the conventional product, the greater the market share of the organic
product.
The equilibrium quantity of the conventional product is then:
)(1 ***ofgmc XXX +−=
))(/()])(())(())([(* γββγβγγβ +−+−+−++−−−+−−+++−= dccbwmmdbwmmdcmmwcbX ccoofgmfgmc
(11)
- 30 -
The smaller the marketing margin, the production costs of the conventional product and/or the
agronomic benefits from producing transgenic products, or/and the larger the marketing
margins and the costs of producing the first-generation GM and organic products, the larger
the market share of the conventional products.
Using equations (1), (9), (3) and (10), the equilibrium price premia paid for conventional and
organic products are, respectively:
)/()( γγ +−++−−−=− dcwmmwmmdcpp ccfgmfgmcfgm
cc (12)
)()( ββ +−−−−++−=− cbwmmwmmcbpp ccoocc
co (13)
From those two equations, it can be inferred that the equilibrium price premium paid for the
conventional products increases with a raise in the marketing margin of the conventional
products or/and a drop in the marketing margin of the first-generation GM products. On the
other hand, the equilibrium price premium paid for the organic products goes up with an
increase in the marketing margin of the organic products or/and a fall in the marketing margin
of the conventional products.
- 31 -
CHAPTER 3
Market Conditions
After the Introduction of
Second-Generation,
Consumer-Oriented GM Products
- 32 -
The first-generation of GM products focused on the provision of agronomic benefits to
agricultural producers (such as herbicide tolerance, insect resistance and viral resistance) as
well as on environmental benefits from reduced herbicide and insecticide use, and reduced
agricultural tillage leading to soil erosion (Bertheau and Davison, 2006). The second-
generation of GM products aims at offering benefits to consumers, such as enhanced
nutritional value and functional characteristics that reduce the risk of diseases.
To date, GM techniques have been utilized to alter nutritional profiles by: increasing the
content of vitamins, minerals and other micronutrients, modifying fats and oils, altering the
starch and sugar content, altering the protein/amino acid profile, reducing levels of anti-
nutritional/allergy factors and flavor enhancements (Dibb and Mayer, 2000). The famous
example of second-generation GM products is the rice with enhanced levels of beta-carotene
(the precursor of vitamin A) and iron. This, so-called, 'golden rice', developed by Swiss
researchers, has been promoted as a means of addressing the problems of vitamin A
deficiency in developing countries.
The new GM foods are also known as health-enhancing foods, enriching products, or friendly
GM products. This new food category, positioned between medicine and conventional foods,
has attracted the attention of consumers, market researchers, public health policy makers, and
the food industry and is expected to receive a more positive reaction than their first-
generation, producer-oriented counterparts.
This change in consumer attitudes towards GM food was captured by Li et al. (2002) who
found that the Chinese consumers in their sample were willing to pay, on average, a 38%
premium for golden rice. Similarly, Boccaletti and Moro (2000) reported a decrease in the
percentage of Italian consumers who refuse to buy GM food products, from 17% to 12%,
when the GM products had enhanced nutritional and organoleptic characteristics, and longer
shelf life. The same tendency was reported in Colombia, where the willingness to buy a food
product increased significantly when GM products contained a characteristic desired by
consumers, such as enhanced nutrition and taste (Pachico and Wolf, 2002).
In this chapter, we seek to determine the equilibrium conditions after the introduction of the
new, consumer-oriented GMPs (new GMPs, hereafter) in markets that, like the EU, mandate
the labeling of the first-generation, producer-oriented GM products.
- 33 -
3.1. The Model
With the introduction of the new GM products, the consumer has an additional option
available and his utility function becomes:
ζ αθ α −−++= csgmsgm pVUU )( : if a unit of second-generation GMP is consumed
γα−−= cfgmfgm pUU '' : if a unit of first-generation GMP is
consumedccc pUU '' −= : if a unit of conventional product is consumed
βα+−= coo pUU '' : if a unit of organic product is consumed
where sgmU is the utility associated with the unit consumption of the new GMP; csgmp is the
consumer price of the new GMP; and θ α+V is the value consumers place on the new
quality-enhancing attribute of the new product (e.g., vitamin A in ‘golden rice’). This value
increases with α indicating that consumers that value high quality the most (i.e., consumers
with higher values of α) place a greater value on the quality enhancement embedded in the
new GMP. All other variables are as defined previously.
Similar to consumers, the introduction of the new GM products offers another option to
agricultural producers who now face the choice between the second-generation GM, first-
generation GM, conventional and organic products. The net returns function of the producer
with differentiating attribute A becomes:
)( dAwp sgmf
sgmsgm +−=∏ : if a unit of second-generation GM product is produced
)('' dAwp fgmffgmfgm +−=∏ : if a unit of first-generation GM product is
produced
)('' cAwp cfcc +−=∏ : if a unit of conventional product is produced
)('' bAwp ofoo +−=∏ : if a unit of organic product is produced
where: sgm∏ are the net returns associated with the production of the second-
generation GM product, fsgmp is the farm price of the new GMP, and sgmw is the
base cost of production of the new GMP. All other variables are as previously defined.
- 34 -
Since we assume that both generations of GM products share the same agronomic
characteristics, the cost enhancement factor associated with their production is the
same. In such a case, for producers to adopt the new GM products, the net returns
associated with the production of these products have to exceed the net returns
associated with the production of their first-generation counterparts, i.e.,
fgmffgmsgm
fsgm wpwp −>− ' . It should be noted, however, that this, necessary for the
adoption of the second-generation GMPs, condition, is also a sufficient condition for
driving the first-generation GMPs out of the market.
Result 1. The introduction of second-generation, consumer-oriented GM products that share
the same agronomic characteristics with their first-generation, producer-oriented
counterparts drives the first-generation GM products out of the market.
This result is consistent with the findings of Giannakas and Yiannaka (2008) on the market
and welfare effects of the introduction of the new GM products in a market that, like the US,
does not require segregation and labeling of the first-generation GM products. An important
implication of this similarity is that, no matter if the first-generation GM products are required
to be labeled or not, the introduction of their second-generation counterparts that share the
same agronomic characteristics will drive them out of the market.
When the condition that results in the successful entry of the new GMPs is met, the consumer
choice is reduced to that between the new GMPs, the conventional and the organic products.
Setting ζθγ +=' , the consumer utility function becomes:
αγ '−−+= csgmsgm pVUU : if a unit of second-generation GM product is consumed
ccc pUU '−= : if a unit of conventional product is consumed
βα+−= coo pUU ' : if a unit of organic product is consumed
In addition to driving the first-generation GMPs out of the market, the introduction of the new
GMPs can be shown to change the nature of the relationship between the GM products and
their conventional and organic counterparts from vertical to horizontal product differentiation.
This finding also appears in Giannakas and Yiannaka (2008) and its proof can be found in the
appendix.
3.2. Consumer decisions and welfare after the introduction of the new GMP
- 35 -
Figure 3.1 illustrates the decisions and welfare of consumers in the presence of the second-
generation GM products. The upward sloping curve graphs utility levels when the organic
product is consumed, while the downward sloping line depicts the utility when the second-
generation of GM product is consumed for different levels of the differentiating attribute α.
By finding the indifferent consumer, located at the intersection of two utility curves, we can
determine the consumer demand for each product.
Specifically, the intersection of the utility curves associated with the consumption of the new
GM and conventional products determines the consumer with differentiating characteristic
'/)'(': γαα cc
csgmsgmcsgmsgm ppVUU +−=⇒= who is indifferent between the new GMP and
the conventional product. Similarly, the consumer with differentiating characteristic
βαα /)''(''':' cc
cococc ppUU −=⇒= is indifferent between the conventional and organic
products. Consumers located to the left of sgmα prefer the new GMP, consumers with
]',( csgm ααα∈ prefer the conventional product, while consumers with ]1,'( cαα∈ prefer the
- 36 -
Figure 3.1: Consumer decisions and welfare after the introduction of the new GM products
organic. The consumer demands for the second-generation GM, the conventional and the
organic products are then, respectively:
'/)'( γα cc
csgmsgm
Dsgm ppVX +−== (14)
'/)](')'(''['' βγββγγαα csgm
cc
cosgmc
Dc pVppX −−+−=−= (15)
ββα /)''('1' cc
coc
Do ppX +−=−= (16)
Aggregate consumer surplus is given by the shaded area underneath the effective utility curve
in Figure 3.1 and equals:
Σ++=++= ∫ ∫∫ NMdUdUdUCSc
sgm c
sgm
ocsgm
' 1
'0'''
α
α α
αααα ⇒
)2/'(2/)²''('2/)²'(' ββγ +−+−++−= co
cc
co
cc
csgm pUppppVCS (17)
3.3. Producer decisions and welfare after the introduction of the new GMP
A farmer’s production decision is determined by comparing the net returns associated with the
production of the different products. Figure 3.2 graphs the producer decisions and welfare
when the prices and agronomic parameters are such that all products enjoy positive market
shares.
- 37 -
Figure 3.2.: Producer decisions and welfare after the introduction of the new GM products
Producers with differentiating attribute ]',0[ 0AA∈ find it optimal to produce organic
products as the returns generated from their production exceed those generated by the
other alternatives. Producers with ]','[ 0 cAAA∈ produce the conventional product and
producers with ]1,'[ cAA∈ find it optimal to produce the new GMP. The supply
functions of the three products are given by:
)/()''('' cbwwppAX cofc
foo
So −+−−==
)/()''()/()'(''' cbwwppdcwwppAAX cofc
fosgmc
fsgm
fcoc
Sc −+−−−−+−−=−=
(18)
))(/()]'()''()'([ dbdcwwppbwwppdwwppc sgmcf
sgmfcco
fc
foosgm
fo
fsgm −−+−−++−−++−−=
(19)
)/()'(1'1' dcwwppAX sgmcf
sgmfcc
Ssgm −+−−−=−=
(20)
Aggregate producer welfare is given by the shaded area underneath the effective net returns
curve in Figure 3.2 and equals:
∫∫∫ Φ++=∏+∏+∏=1
'
'
'
'
0'''
c
c
o
o
A sgm
A
A c
A
o HGdAdAdAPW ⇒
2/)(2/)²''()(2/)²''(' dwpdcwwppcbwwppPW sgmf
sgmsgmcfsgm
fcco
fc
fo −−+−+−−+−+−−=
(21)
- 38 -
3.4. Market outcome after the introduction of the new GMP
When the three product versions (conventional, second-generation GM and organic) co-exist
in the market, their equilibrium quantities are derived by equating the relevant product
demands and supplies summarized in table 3.1 below.
Table 3.1: Product demands and supplies after the introduction of the new GMPs
Specifically, by equating equations (14) and (20), the equilibrium quantity of second-
generation GM products is given by:
)'/()'(* γ+−−+++−−= dcdcwmmwmmVX ccsgmsgmsgm (22)
Based on equation (22), for sgmX * to be positive, the base consumer valuation of the quality
enhancement of the new GMP, V, has to be greater than a critical value V* where
dcwmmwmmV ccsgmsgm +−−−+= '*
The greater the consumer valuation V, the agronomic benefits from GM production, the
marketing margin and cost of producing the conventional products, the greater the market
share of the new GM products. On the other hand, the market acceptance of the new GMPs
falls with the cost of production, the marketing margin and the consumer aversion to these
products.
When V>V*, the equilibrium quantities of organic and conventional products are,
respectively:
- 39 -
)/()''('* cbwmmwmmX ccooo −+++−−= ββ (23)
)')(/()]')('()')('()')([('* γββγβγγβ +−+−++−+−−−+−−++−+−= dccbwmmdbwmmdcwmmVcbX ccoosgmsgmc (24)
The smaller the marketing margin and cost of producing the organic products, or/and the
greater the consumer preference for organic products, the marketing margin and cost of
producing the conventional products, the greater the market share of the organic products.
Using equations (22) and (14), the price premium enjoyed by the new GMP can be
determined as follows:
)'/()]'(')([' γγ +−−−++−−−=− dcwmmwmmdcdcVpp sgmsgmcccc
csgm (25)
while from equations (23) and (16), the price premium enjoyed by the organic product in the
presence of the second-generation GMP is given by:
)/()('' ββ +−−−++−=− cbwmmwmmcbpp ccoocc
co (26)
In analyzing the effects of the introduction of the new GM products into the market, it is
important to point out that the co-existence of the new GMP with its organic and conventional
counterparts holds for values of V that are greater than V* but less than V** where
)/()]')('()')('()')([(** βγββγγβ +−+++−−−++−++++−= cbwmmdbwmmdcwmmcbV ccoosgmsgm
If V exceeds V**, then equation (24) suggests that the introduction of the new GMP drives the
conventional product out of the market. The next chapter will present all possible scenarios on
the effects of the new GM product on the markets for first-generation GM, conventional and
organic food products.
- 40 -
CHAPTER 4
- 41 -
Market and Welfare Effects
of the Introduction of
Second-Generation,
Consumer-Oriented GM Products
- 42 -
4.1. Market effects of the introduction of the new GM products
As mentioned previously, the number and type of products available to consumers after the
introduction of the new GMP depends on the value consumers place on the quality-enhancing
attribute of the new GMP. So, when V is below the critical value V*, the new technology is
deemed ineffective as there is no producer that will find it optimal to adopt this technology
(and produce the new GMP). Thus, for sgmX * to be positive, V has to be greater then *V .
The successful entry of the new GMP (occurring when *VV > ) comes at the expense of the
first-generation GM products that are driven out of the market by their second-generation
counterparts. Consumers of the first-generation GMP are not the only ones lured to the new
GMP, however. The greater is the consumer valuation of the quality-enhancing attribute of
the new GMP, the greater is the share of conventional product consumers that find it optimal
to switch to the new GMP. When V exceeds the critical value **V , the introduction of the
new GMPs drives both the first-generation GM and the conventional products out of the
market. Figure 4.1 depicts the equilibrium consumption and production choices when
**VV > and the new GMP co-exists with its organic counterpart.
- 43 -
Figure 4.1: Consumer and producer decisions when V >V**
The consumer demands for the two products are, then, given by:
)'/()'('' γβα ++−== co
csgmsgm
Dsgm ppVX
(27)
)'/()''('1' γβγβα +−+−+=−= co
csgmsgm
Do ppVX (28)
and the supplies of these products by:
)/()'('' dbwwppAX sgmof
sgmfoo
So −+−−== (29)
)/()'('1' dbwwppdbAX sgmof
sgmfoo
Ssgm −−++−−=−=
(30)
By equating (27) to (30) and (28) to (29), the equilibrium quantities of second-generation GM
and organic products are derived as:
)'/()'(* γβ ++−−+++−−= dbdbwmmwmmVX oosgmsgmsgm (31)
)'/()]''('* γβγβ ++−−++−−+= dbVwmmwmmX sgmsgmooo (32)
and the price premium enjoyed by the organic product is:
)'/()]()')('[(' γβγβ ++−−−−+−−++=− dbdbVdbwmmwmmpp sgmsgmoocsgm
co
(33)
It is important to note that the greater is the consumer valuation V , the greater is the share of
consumers who choose the new GMP over the organic product. Equation (32) indicates that
when V exceeds a critical value ***V where
gmsgmoo wmmwmmV ++−−+= ''*** γβ
the introduction of the new GMPs drives all three substitutes (i.e., first-generation GM,
conventional and organic) out of the market and becomes the only option available to
consumers and producers. Figure 4.2 graphs the consumer valuation of the quality-enhancing
attribute of the new GMPs against the consumer aversion to these products and summarizes
- 44 -
the market effects of the introduction of the second-generation, consumer-oriented GM
products identified in our study.
Before delving into the determination of the welfare effects of the introduction of the second-
generation, consumer-oriented GM products into the food system of a country that mandates
the labeling of the first-generation GM products, it is important to point out that our results on
the market effects of the introduction of the new GMPs are consistent with those of Giannakas
and Yiannaka (2008) indicating that the market effects of the new GMPs are not dependent on
the labeling regime that governs the first-generation, producer-oriented GM products. Put in a
different way, no matter if a country requires the labeling of the first-generation GM products
or not, the market effects of the introduction of consumer-oriented GMPs are the same. While
the market effects are the same, the next section of this thesis will show that the existence of a
mandatory labeling regime governing the first-generation of GM products can affect the
- 45 -
Figure 4.2: Market effects of the introduction of the new GM products
welfare implications of the new GM products – their effect on consumers and producers of
different products.
4.2. Welfare effects of the introduction of the new GM products
After having identified the market effects of the introduction of consumer-oriented GMPs in a
market that, like the EU, mandates the labeling of the first-generation GMPs, we focus next
on the other main objective of this thesis – namely, the determination of the welfare effects of
the new GMPs. In particular, this section focuses on determining the effect of the introduction
of the new GM products on the welfare of consumers and producers of the different products
involved.
Relying on the market effects of the new GMPs determined earlier, we discuss changes in
prices and, through them, changes in consumer utility and producer net returns under all
scenarios involving the entry of new GMPs into the market (i.e., the three scenarios in which
the new technology is effective and 0* >sgmX ).
Recall that when ],[ *** VVV ∈ , the introduction of the second-generation GM product drives
the first-generation GMP out of the market and attracts some consumers of conventional
products who switch their consumption to the new GMP. This reduces the demand for
conventional product )'( cc XX < and, thus, it reduces the equilibrium price of this product
)'( cc
cc pp < . The reduced c
cp increases the utility associated with the consumption of the
conventional product (i.e., it shifts the utility curve cU upwards). This increase lures some
consumers away from the organic product resulting in reduced demand for, and price of the
organic product. The reduced cop causes in turn an increase in the utility associated with the
consumption of the organic product (i.e., and shifts the oU upwards).
In addition to increasing cU and oU , the reduced prices of conventional and organic
products result in reduced net returns associated with the production of these products. Thus,
while the consumers of conventional and organic products gain after the entry of the new
- 46 -
GMPs into the market, the producers of these products lose. Producers of the GM product
gain (if they did not they would not have switched their production to the new GMPs), while
the effect of the new GMPs on the consumers of the GM product depends on the value of V. If
V exceeds the difference in price between the first- and second-generation GMPs (i.e., if
cfgm
csgm ppV −< ), α∀> fgmsgm UU and all GM consumers benefit from the introduction of
the new GMPs. If, on the other hand, cfgm
csgm ppVV −<<* some consumers with low values
of the differentiating attribute α lose as the value they place on the quality-enhancing
attribute of the new GMP is less that the extra money they have to pay for the new product.
It is important to point out that the findings that (a) some GM consumers may lose and (b)
producers of the conventional product always lose after the introduction of the new GMPs are
in sharp contrast with the results of Giannakas and Yiannaka (2008) who show that all GM
product consumers gain and producers of the conventional product can benefit from the
introduction of the new GMPs when those enter in a country that, like the US, does not label
its products. This is a very important finding of this paper since, even though the GM market
is miniscule in the EU, conventional producers represent at this point the vast majority of
agricultural producers in the EU. The reason for the different effect of the new GMPs on the
welfare of conventional producers is that, while the exit of the first-generation GMPs (that
follows the entry of the new GMPs) results in increased price for the conventional product
when conventional and first-generation GM products are marketed together as a non-labeled
good, for the reasons discussed earlier, when the new GMPs enter a market that, like the EU,
segregates the conventional products from their first-generation counterparts, the price of the
conventional product always falls.
The gains in consumer surplus when ],[ *** VVV ∈ and cfgm
csgm ppV −> are given by:
∫∫∫∫∫ −+−+−+−+−=∆1
'
'
0)'()'()'()()(
c
c
c
c
sgm
sgm
fgm
fgm
dUUdUUUUdUUdUUCS oooccccsgmfgmsgm α
α
α
α
α
α
α
ααααα
(34)
and the change in producer welfare is:
- 47 -
∫∫∫∫∫∫ ∏−∏+∏−∏+∏−∏+∏−∏−∏−∏−∏−∏−=∆1
'
'
"
"
'
'
0)()()()'()'()'(
c
c
sgm
sgm
c
c
c
c
o
o
A fgmsgm
A
A csgm
A
A sgmc
A
A ccco
A
A
A
oo dAdAdAdAdAdAPS (35)
The welfare effects of the new GMPs when ],[ *** VVV ∈ and cfgm
csgm ppV −> are depicted
in Figure 4.3 while Figure 4.4 graphs the case where V ∈(V**, V***].
- 48 -
Recall that when the consumer valuation V exceeds the critical value **V , the introduction
of the new GMPs drives the first-generation GM and conventional products out of the market
and attracts also some consumers of the organic product. The demand for organic product
falls and so does its price. This price reduction benefits the consumers who find it optimal to
keep consuming the organic product after the introduction of the new GMP resulting in all
consumers gaining from the entry of the second-generation GMPs when V ∈(V**, V***]. The
consumer welfare gains are given by:
∫∫∫∫ −+−+−+−=∆1
0)'()()()(
sgm
sgm
c
c
fgm
fgm
dUUdUUdUUdUUCS ooosgmcsgmfgmsgm α
α
α
α
α
ααααα
(36)
The reduction in the price of the organic product results in reduced net returns to the organic
production and welfare losses for organic producers. On the other hand, the producers of first
generation GM and conventional products that find it optimal to switch to the production of
the new GMP realize a welfare increase. The change in producer welfare when
],( ***** VVV ∈ is:
∫∫∫∫ ∏−∏+∏−∏+∏−∏−∏−∏−=∆1
'
'
0)()()()'(
c
c
o
o
o
o
A fgmsgm
A
A csgmsgm
A
A o
A
oo dAdAdAdAPS (37)
Finally, when the base consumer valuation of the new GMP exceeds the critical value ***V ,
the introduction of the new GMPs drives all substitute products out of the market. All
consumers gain in this case and so do producers of conventional and first-generation GM
products that have switched their production to the new GMP. The only losers in this case
could be some previous inefficient producers of the organic product (i.e., those with
]',0[ oAA∈ in Figure 4.5). The changes in consumer and producer welfare when ***VV >
are:
∫ ∫∫ −+−+−=∆1
)()()(c
c
fgm
dUUdUUdUUCS osgmcsgmfgmsgm α
α
αααα
(38)
- 49 -
∫∫∫∫ ∏−∏+∏−∏+∏−∏+∏−∏−=∆1
'
'
0)()()()(
c
c
o
o
o
o
A fgmsgm
A
A csgm
A
A osgm
A
sgmo dAdAdadAPS (39)
- 50 -
X c X
o
10
p- wo
p- wo
p- wc
p- wc
Differentiating producer attribute (A)
X sgm
A’’c
p -w
fgm
X fgm
A c
p- wsgm
Net Returns
X o
A’o
X’c
A’c
Panel (b). Producer decisions and welfare
Asgm
U – p’U – p
U+V – p
α c
Differentiating consumer attribute (α)
ConsumerUtility
0
U – p’U – p
X c
X o
1
U – p
α fgm
X fgm
X’ o
α sgm
X’ c
X sgm
α'c
Panel (a). Consumer decisions and welfare
- 51 -Figure. Market and Welfare Effects of the New GM products when V** < V < V**
V > V***
Figure 4.3. Market and welfare effects of the new GM products when V* < V < V**
U – p
U+V – p
α c
Differentiating consumer attribute (α)
ConsumerUtility
0
U – p
X c
X o
1
X sgm
U – p
α fgm
X fgm
X’ o
α sgm
U – p’
X cX
o
10
p- wo
p’- wo
p- wc
Differentiating producer attribute (A)
X sgm
A o
p -w
fgm
X fgm
A c
p- wsgm
Net Returns
X’o
A’o
Panel (b). Producer decisions and welfare
Figure. Market and Welfare Effects of the New GM products when V** < V < V**
V > V***
Figure 4.4. Market and welfare effects of the new GM products when V** < V < V***
Panel (a). Consumer decisions and welfare
- 52 -
U – p
U+V – p
α c
Differentiating consumer attribute (α)
ConsumerUtility
0
U – p
X c
X o
1
X sgm
U – p
α fgm
X fgm
Panel (a). Consumer decisions and welfare
Figure 4.3. Market and Welfare Effects of the New GM products when V > V***Figure 4.5. Market and welfare effects of the new GM products when V > V***
X cX
o
10
p- wo
p- wc
Net Returns
Differentiating producer attribute (A)
X sgm
p- wsgm
A o
p -w
fgm
X fgm
A c
A’ o
Panel (b). Producer decisions and welfare
Figure 4.5. Market and welfare effects of the new GM products when V > V***
CHAPTER 5
Summary and
Concluding Remarks
- 53 -
Objective and structure
The objective of this thesis has been to determine the market and welfare effects of the
introduction of second-generation, consumer-oriented GM products in a market that, like the
EU, mandates the segregation and labeling of the first-generation, producer-oriented GM
products. In particular, the study focused on the effect of the second-generation GM products
on the markets for conventional, GM and organic products, and the welfare of consumers and
producers of these products.
The thesis was structured as follows: chapter 1 presented an overview on the adoption,
acceptance and regulation of GM products around the world. The next two chapters
developed the theoretical framework and determined the equilibrium conditions and welfare
before and after the introduction of the new, consumer-oriented GM products. The following
chapter determined then the market and welfare effects of the introduction of the second-
generation, consumer-oriented GMPs, that have been the focal point of this thesis.
Importance and strengths
This study represents the first attempt to systematically analyze the economic effects of the
next generation of GM products in markets that have a mandatory labeling regime governing
the first-generation of producer-oriented GM products.
To analyze the economic impacts of the consumer-oriented GM products, the thesis adapted
and extended frontier models of heterogeneous consumers and producers that allow for both
vertical and horizontal differentiation of GM, conventional and organic products and facilitate
the estimation of consumer and producer welfare in a theory-consistent and tractable manner.
Our analysis reveals important new insights on the likely impacts of the new GM products
that should be of interest to academics, policy makers, and all participants in the conventional,
GM and organic food supply channels.
Results
A key finding of this thesis is that, no matter the labeling regime governing the first-
generation GM products, the market effects of the introduction of the new GMPs are the
same. In particular, the introduction of the second-generation, consumer-oriented GMPs:
- 54 -
(a) drives the first-generation, producer-oriented GMPs that share the same agronomic
characteristics out of the market
(b) can change the nature of the relationship between the GM products and their conventional
and organic counterparts from one of vertical to one of horizontal product differentiation.
The effect of the new GMPs on the markets for conventional, GM and organic products is
case-specific and dependent on:
(i) the consumer valuation of the quality-enhancing attribute of the new GMP
(ii) the level of consumer aversion to GMOs
(iii) the strength of consumer preference for organic products
(iv) the production costs and marketing margins in the different supply
channels
The greater the consumer valuation of the new GMP, V, the greater the share of consumers
attracted to the new product and the lower the market shares of its conventional and organic
counterparts.
When V exceeds a critical value V** (determined in this thesis), the new GM product drives
out of the market both the first-generation GM and the conventional product and coexists with
the organic product. When V is very high (i.e., when it exceeds a critical value V***, also
determined in this thesis), then the introduction of the consumer-oriented GMPs drives out all
three substitutes (i.e., first-generation GM, conventional and organic products) and dominates
the market.
The finding that the labeling policy for the first-generation GMPs does not affect the market
effects of the second-generation GMPs is quite important as the presence or absence of labels
for the first-generation GMPs has been shown to be a key determinant of market equilibria
and welfare in countries with these first-generation GMPs in place.
While the policy on the labeling of the first-generation GMPs does not affect the market
effects of the second-generation GMPs, it does affect their welfare implications – i.e., their
effect on consumer and producer welfare. In particular, when the new GMPs enter in markets
that, like the EU, mandate the labeling of the first-generation GM products and end up co-
existing with their conventional and organic counterparts (i.e., when V∈[V*,V**)), then:
- 55 -
- Producers of GM products and consumers of conventional and organic
products gain
- Producers of conventional and organic products lose (due to reduced demands
for, and prices of these products)
- Consumers of the GM product may gain or lose depending on their aversion to
GMOs, the value they place on the new GMP and the price of this new
product.
When V ∈ [V**,V***) and the new GMPs drive the first-generation GM and conventional
products out of the market,
- All consumers and those producers that switch to the new GMP gain
- Producers of the organic product lose
Finally, when V >V*** and the new GMP dominates the market,
- All consumers and previous producers of GM and conventional products gain
- Some relatively inefficient previous organic producers may lose.
The results that (a) some GM consumers may lose and (b) producers of the conventional
product always lose from the introduction of the new GMPs when V∈[V*,V**) are in sharp
contrast with the results of Giannakas and Yiannaka (2008) who show that all GM product
consumers gain and producers of the conventional product can benefit from the introduction
of the new GMPs when those enter in a country that, like the US, does not label its products.
This is a very important finding of this paper since, even though the GM market is miniscule
in the EU, conventional producers represent, at this point, the vast majority of European
agricultural producers.
Limitations of the study
This thesis provides important insights on the economic effects of second-generation,
consumer-oriented GM products in markets that, like the EU, require the first-generation GM
products to be labeled as such. A calibration of our models with real world data and a
simulation analysis on the values of the key parameters would provide policy makers and the
interest groups involved with valuable insights on the potential magnitude of the market and
welfare effects of the second-generation GM products determined in this thesis.
- 56 -
References
Bertheau Y., Davison J. (2007). “The theory and practice of European traceability regulations for genetically modified food and feed”. International Symposium on Traceability for Food Safety. Editor Cheol-Hi Lee, Rural Development Administration of Korea. ISBN 11-1390000-001753-01. pp 187-204.
Boccaletti S., and Moro D. (2000). “Consumer Willingness to Pay for GM Food Products in Italy.” AgBioForum 3:259-267.
Bonnisseau J.M., Lahmandi-Ayed R. (2006). “Vertical Differentiation: Multiproduct Strategy to Face Entry?”. Volume 6, Issue 1 -Article 15. The B.E. Journal of Theoretical Economics.
Dibb S., Mayer S. (2000). Biotech - The next generation Good for whose health? The Food Commission (UK) Ltd and GeneWatch UK.http://www.foodcomm.org.uk/biotech_summary.htm
Fulton M., Giannakas K. (2004). “Inserting GM Products into the Food Chain: The Market and Welfare Effects of Different Labeling and Regulatory Regimes.” American Journal of Agricultural Economics 86: 42-60.
García P.R. (2006). Directive 2001/18/EC on the Deliberate Release into the Environment of GMOs: an Overview and the Main Provisions for Placing on the Market. http://www.ambientediritto.it/dottrina/Dottrina_2006/Directive_2001.18.EC_Garc%C3%ADa.pdf
Giannakas K., Fulton M. (2002). “Consumption Effects of Genetic Modification: What if Consumers are Right?” Agricultural Economics 27: 97-109.
Giannakas K., Yiannaka A. (2006). “Agricultural Biotechnology and Organic Agriculture: National Organic Standards and Labeling of GM Products.” AgBioForum 9, 2: 84-93.
Giannakas K., Yiannaka A. (2008). “Market and Welfare Effects of the Second-Generation, Consumer-Oriented GM Products.” American Journal of Agricultural Economics 90: 1, 152–171.
Gruère G.P. (2006). “An Analysis of Trade Related International Regulations of Genetically Modified Food and their Effects on Developing Countries”. EPT Discussion Paper 147. http://www.ifpri.org/DIVS/EPTD/DP/papers/eptdp147.pdf
James C. (2006). “Global Status of Commercialized Biotech/GM Crops”. ISAAA Brief No. 35.ISAAA: Ithaca, NY.
Lapan H.E., Moschini G. (2004). “Innovation and Trade with Endogenous Market Failure: The Case of Genetically Modified Products.” American Journal of Agricultural Economics 86: 634-48.
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Lence S.H., Hayes D.J. (2005). “Genetically Modified Crops: Their Market and Welfare Impacts”. American Journal of Agricultural Economics, Vol. 87, 4, pp. 931-950.
Li Q., Curtis K.R, McCluskey J.J., Wahl T.I. (2002). “Consumer Attitudes toward Genetically Modified Foods in China.” AgBioForum 5:145-152.
Pachico D., Wolf M. (2002). “Attitudes toward Genetically Modified Food in Columbia.” Paper presented at the 6th International ICABR Conference in Ravello, Italy.
Potter N.N., Hotchkiss J.H. Food Science. Edition 5.(1995)
Veyssiere L., Giannakas K. (2006).“Strategic Labeling and Trade of GMOs.” Journal of Agricultural & Food Industrial Organization 4: 1-38.
Electronic references
http://www.isaaa.org/resources/publications/briefs/35/executivesummary/default.html
http://www.gmo-compass.org/eng/agri_biotechnology/gmo_planting/191.eu_growing_area.html
http://www.Biomatnet.org/publications/2024con.pdf
http://www.saasinc.org/Tulsa2004/TulsaPresentations/SAAS_Hoban.ppt
http://ec.europa.eu/enterprise/pharmaceuticals/eudralex/vol-1/dir_1990_219/dir_1990_219_en.pdf
Official Journal of the European Communities - 8.5.90 - Page No L 117/15COUNCIL DIRECTIVE of 23 April 1990 on the deliberate release into the environment of genetically modified organisms (90/220/EEC)http://www.biosafety.be/GB/Dir.Eur.GB/Del.Rel./90.220/TC.html
Official Journal of the European Communities - 11.1.2000 - No L 6, P. 0013-0014COMMISSION REGULATION (EC) No 49/2000 of 10 January 2000 amending Council Regulation (EC) No 1139/98 concerning the compulsory indication on the labeling of certain foodstuffs produced from genetically modified organisms of particulars other than those provided for in Directive 79/112/EEChttp://www.biosafety.be/GB/Dir.Eur.GB/FF/49_2000/49_2000.html
Official Journal of the European Communities. 11. 1. 2000. L 6/15COMMISSION REGULATION (EC) No 50/2000 of 10 January 2000 on the labeling of foodstuffs and food ingredients containing additives and flavorings that have been genetically modified or have been produced from genetically modified organisms.http://www.biosafety.be/PDF/50_2000.pdf
http://www.foodcomm.org.uk/biotech_report.htm
- 58 -
Labeling, presentation and advertising of foodstuffs (2007): http://europa.eu/scadplus/leg/en/lvb/l21090.htm
Traceability and labeling of genetically modified organisms (GMOs) http://europa.eu/scadplus/leg/en/lvb/l21170.htm
http://www.nutraceuticalsworld.com/articles/2007/11/online-exclusive-the-greening-of-functional-food-packaging.php)
http://www.nutraingredients.com/news/ng.asp?n=71577-lipgene-netabolic-syndrome
http://www.gmo-compass.org/eng/agri_biotechnology/gmo
http://ec.europa.eu/enterprise/pharmaceuticals/eudralex/vol-1/dir_1990_219/dir_1990_219_en.pdf
http://www.foodproductiondaily.com/news/ng.asp?id=30723
http://www.nutraceuticalsworld.com/articles/2007/11/online-exclusive-the-greening-of-functional-food-packaging.php
EU Health and Consumer Protection Commissioner David Byrne, quoted in "GM laws to pave way for lifting of EU approvals ban," 2003, July 3. European Voice.com, 9(25). Available on the World Wide Webhttp://www.european-voice.com.
http://www.nuffieldbioethics.org/go/browseablepublications/gmcropsdevcountries/report_211.html
- 59 -
APPENDIX
- 60 -
This appendix shows how the introduction of the second-generation, consumer-oriented GM
products can change the relationship between GM products and their organic and
conventional counterparts from vertical to horizontal product differentiation.
A. Only organic and new GM products are available in the market and csgm
co pp ='
When offered at the same price, the organic and second-generation GM products can be
horizontally or vertically differentiated depending on the values of the preference parameters.
Specifically, when csgm
co pp '' = , αγβ )')(()(' +≤≥⇒≤≥ VUU sgmo .
Case A.1. If )'( γβ +<V , the organic products and their second-generation GM counterparts
are horizontally differentiated since consumers with differentiating attribute
)]'/(,0[ γβα +∈ V would buy the new GMPs while consumers with ]1),'/(( γβα +∈ V
would prefer the organic.
Case A.2. If )'( γβ +≥V , α∀≥ osgm UU ' and all consumers would purchase the second-
generation GM products. In this case, the GM and organic products are vertically
differentiated with the new GM product being the high quality one
B. Only conventional and new GM products are available in the market and csgm
cc pp ='
When the second-generation GM products and their conventional counterparts are offered at
the same price, αγ ')()(' <≥⇒<≥ VUU sgmc .
Case B .1 . If V<γ’, the conventional and second-generation GM products are horizontally
differentiated since consumers with differentiating attribute ]'/,0[ γα V∈ would buy the new
GMP, while consumers with ]1,'/[ γα V∈ would prefer the conventional product.
Case B.2. If αγ ∀≥≥ csgm UUV ',' and all consumers would buy the new GM products. In
this case, the GM and the conventional products are vertically differentiated with the new
GMP being the high quality product.
- 61 -
C. Organic, conventional and new GMPs are available in the market and
csgm
cc
co ppp == ''
When the three products co-exist in the market under the same price, a first consequence is
that the conventional products are driven out of the market since cU ' lies above oU ' , as
shown in figure A.1., due to the vertical differentiation of organic and conventional products.
With the conventional products out of the market, the situation is similar to the situation (A)
when only the organic and new GM products are available to consumers.
Source: Giannakas and Yiannaka (2008).
- 62 -
Figure A.1: Consumption decisions after the introduction of
the new GM products when p’o
c
= p’c
c
= p sgm
c
- 63 -
